Email this article to a friend

Private equity investors are looking to increase their exposure to funds focused on renewable energy, clean technology and sustainability investments, on the basis that green investments will generate high financial returns, research released Tuesday shows.

Two-thirds of institutional investors worldwide have already made green investments but the majority currently allocate less than 5% of their planned investments, according to a poll carried out jointly New Energy World Network and research firm AltAssets. This is expected to change substantially with just 6% of those polled saying they didn't want any exposure to green funds and the others planning to increase exposure, some to as much as 20% of their total annual allocation to private equity.

"Most are taking a cautious but positive step into the green sector," the study said.

"However, there is strong expectation in the private equity industry that the performance of green investments will improve over the next few years and that increased institutional allocations will follow," it added.

Renewable energy projects and assets, such as those in energy efficiency, energy storage and smart grid, promise huge returns because of the long-term predictable cash flow guaranteed by an increasing focus by governments worldwide on the sector, making business easier for renewable energy facilities.

Over the last few months alone major buyout funds have targeted the sector, some for the first time. For example, US buyout firm First Reserve Corp.--which focuses on energy--has just made its first substantial infrastructure commitment to support renewable energy projects through a joint venture totaling up to $1.5bn, with solar developer SunEdison, a division of MEMC Electronic Materials. At the time, First Reserve said it plans more investment in renewables.

Meanwhile, smaller funds such as midmarket HgCapital Renewable Power Partners has ramped up the pace of investments in the sector. In February, HgCapital announced three new investments: two Spanish solar-power projects and one UK onshore wind project.

Investors tend to favor growth equity and expansion funds that invest in companies that have proven their technology to some degree and have the potential to grow to an attractive size and valuation within a limited timescale, according to the study.

"The challenge for green private equity and venture capital managers is to accelerate the current levels of interest and future expectations into actual commitments into their funds sooner rather than later," it added.